Taxation of Services. Overlap in Centre - State division of taxing powers

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1 ' = * cutting through complexity 1 Taxation of Services. Overlap in Centre - State division of taxing powers i %r-- Sachin Menon Head of Indirect Taxation, KPMG, India 07 December 2012

2 Contents The overlap Issues - Intellectual Property Rights - Information Technology Software - Works contracts/ hire purchase GST - Solution?

3 Overlap in powers of state and central governments Services -The Constitution of India gives exclusive authority to Central Government to tax 'services' and 'manufacture of goods' -Definition of service covers intangible goods as well as contracts involving materials and labour Intangibh goods/ contracts of sale involving goods & services Sale of Goods -The Constitution of India gives exclusive authority to State Government to tax 'sale of goods' -Sale of goods is defined under respective state VAT Act - also covers intangible goods as well as contracts involving materials and labour commonly known as deemed sale) Works Contract Transfer of right to use Hire purchase

4 Issues: Intellectual Property Rights (IPR) State Licencing of IPR Double Taxation Centre ^ X Taxation / J Service Tax: Declared service includes 'temporary transfer or permitting the use or eniovment of anv IPR' V VAT: Transfer of right to use goods is covered under the definition of sale. Goods include software, Patents and Trade Marks. J J Impact of BSNL Judgement: Is licensing subject to State VAT? (Decision of Maharashtra Tribunal in case of Smoking Jones Pizza) Definition of service excludes deemed sales transactions and includes the same as declared service - The final impact? Clarification issued under Taxation of Service -An Education Guide by CBEC

5 Issues: Licensing of Software Taxation Service Tax: Definition of Service includes development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software VAT: Software license included as goods in many state VAT schedules or covered under transfer of right to use goods Excise Duty: Preparation of Packaged software subject to excise duty Issues Programming and providing of computer software is specifically covered under VAT schedule of goods in the state of Karnataka Software licenses are covered in VAT schedule of goods in many states Whether software licensing is subject to service tax or state VAT or both? Software AMC contracts are considered as service, deemed sale or both? Taxability of Paper License (is it goods or services). Levy of Central Excise Duty on sale of packaged software Treatment of Import of packaged software licenses through the Net Whether Customisation of Software are Composite Contracts from the VAT point of view?

6 Issues: Works Contract/ Hire purchase involving goods & service Taxation: Valuation Service Tax is levied on: service portion in execution of a works contract S transfer of goods by hiring, leasing and licensing without transfer of right to use is levied on: transfer of property in goods involved in the execution of works contract delivery of goods on hire purchase Issues Valuation of service portion and value of goods is always disputed. Ambiguity arises from contradicting Laws and conflicting interpretation by the tax administrators

7 Other miscellaneous issues echarge Coupon Voucher Franchisee Fees Activation / Installation Fees for DTH J Leasing of goods: Thin line of difference between VAT and service tax Import of software in relation to goods imported from outside India Entertainment Tax and Service tax: DTH Subscription fees / Hotel etc KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member

8 Complex laws gives rise to Complex structures The tax liability on such transaction can be substantial and can impact the company's financiais significantly Businesses shall take extra care while entering into transactions with over lapping tax implications Possibilities of structuring /re-structuring of the transactions to avoid future litigation Providing adequate commercial substance and proper documentation is the key

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10 Proposed Goods and Service Tax (GST) Regime Broad based 'consumption tax' on goods and services India proposes simultaneous levy of "dual GST" by State and Central Government, on both goods and services ft. It It : I m Input credit available across goods and services at each stage

11 Proposed Goods and Service Tax (GST) Regime Goods and Services Tax is proposed to be implemented in India shortly The GST proposed to bring in homogeneity in definitions and uniform place of supply rules across India 10

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